Globally managed environmental, social, and governance (ESG) assets may top $50 trillion by 2025, and much of that market shift is occurring today as investors become keen on environmental and social governance.
These numbers tell us that organizations shirking ESG are losing out on additional revenue — and depending on the political headwinds of 2023, they may soon find themselves in hot water as new compliance regulations emerge. Just last year, the United States Securities and Exchange Commission proposed new regulations requiring organizations to report on all Scope 1 and 2 carbon emissions, and similar reporting requirements are not far from passing in other jurisdictions.
But it’s not enough for organizations to check rote items off their ESG list. Leaders must identify sustainable, innovative solutions that provide tangible benefits to their stakeholders and employees, not to mention their internal operations.
Here’s what I foresee the future of ESG will hold for organizations in 2023 and beyond:
Operational and financial benefits of ESG
ESG investing is gaining momentum. According to a Gallup poll, nearly half of United States (US) investors (48 percent) say they are “very or somewhat interested” in sustainable investing. This stat exemplifies perhaps the most apparent benefit of ESG: economic opportunity.
Leaders should also read into the flip side of these numbers. If investors are increasingly interested in sustainable and socially responsible investments, the opposite is also true — those organizations ignoring ESG may soon lose traction.
But there are many other reasons to adopt ESG principles. All organizations provide a service or product, be it education, healthcare, or retail. Ideally, that service or product benefits its consumers. When enterprises imbed their existing services with a greater purpose, they create what McKinsey refers to as a “unique raison d’être.” In other words, ESG-based organizations present a strong argument for why their services are not only helpful but also essential.
It’s critical to note that regulators are paying more attention to ESG as it relates to sustainability and diversity, equity, and inclusion (DEI). The days of stricter ESG regulations may come sooner than later. Leaders must prepare for this imminent change as quickly and effectively as possible.
How to implement successful ESG targets
1. Foster organization-wide buy-in
When organizations treat ESG as the responsibility of a single department — or worse, a PR tactic — they set themselves up for failure.
Establishing a commitment to ESG takes more than a slew of press releases. Enterprise leaders must onboard sustainably and socially conscious guidelines across the organization, especially in mission-critical departments like sourcing, operations, and procurement.
Many organizations tackle ESG by first hiring an expert on sustainability or DEI (or both). Although commendable, this first step cannot be the last. Enterprises must enable these individuals to successfully do their job by granting them insight into all operations and expressing the importance of organization-wide buy-in for ESG initiatives. Otherwise, the organization will appear inconsistent and uncommitted to sustainable and social causes.
2. Consider machine learning and artificial intelligence tools
Manually updated data platforms are problematic. Data hosted in these systems are often out-of-date or incorrect. Plus, sourcing suppliers by hand is time-consuming because it requires not only outmoded tools, like long spreadsheets, but also old supplier information can lead to inaccurate requests for proposals (RFPs).
Additionally, when discussing ESG best practices, manual data platforms present an entirely new problem: the inability to search for diverse suppliers intuitively. These issues have far-reaching consequences.
More than half of top procurement leaders (51 percent) report that recent supply chain disruptions caught their organization unawares. Of those same leaders, 41 percent cited that a comprehensive data platform would reduce customer-facing disruptions, and 38 percent said it would reduce overall procurement costs. That’s because leading data platforms rely on artificial intelligence (AI) and machine learning (ML) to compile fresh, accurate information. Leading AI and ML can increase operational efficiency by simplifying repetitive processes like contract lifecycle management (CLM) and expediting the sourcing timeline.
Maybe even more promising are the implications that AI- and ML-backed data platforms have for diverse sourcing. These systems automatically pull and populate information about diverse suppliers, elevating their visibility. For procurement leaders, that means greater accessibility to suppliers who enable business agility and contribute to ESG initiatives.
3. Remain innovative and on top of change
ESG is widely adopted in today’s business environment, but it remains a progressive concept at its heart. Leading ESG strategies will reflect this by moving at the speed of change.
That means constantly monitoring the tumultuous business environment to identify opportunities. In the context of procurement, that could mean contracting with new or emerging diverse suppliers. Most procurement leaders are familiar with diverse spend categories, such as minority-owned or small businesses. But what about minority-owned small businesses?
Working with an emerging and diverse supplier can significantly improve an organization’s operational performance. Small suppliers are highly agile and often more likely to provide diverse tier-two and tier-three options. It’s imperative to prioritize solutions that allow quick identification of these new suppliers — regardless of how popular or lesser-known said category may be.
ESG strategies are highly important across all functions of an organization. Leaders implementing a diverse spending strategy should also consider looking inwards to determine if other practices could influence their organization’s social license.
The argument that ESG is “a distraction” to mission-critical operations is sorely outdated. Consumers overwhelmingly seek out businesses with a strong commitment to social and sustainable responsibility, with two-thirds of US consumers saying they’d pay more for a sustainably made product.
To keep pace with investors’ and consumers’ shifting sentiments — not to mention uphold an organization’s social license — it’s imperative that leaders consider a robust ESG program sooner than later.
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